ANNUAL MEETING OF ASSOCIATION OF AVERAGE ADJUSTERS

REPORT

OF FORTY SECOND ANNUAL MEETING

OF THE ASSOCIATION OF AVERAGE ADJUSTERS

OF CANADA

Held at the National Club, Toronto, Ontario on November 24^th, 2008

OFFICERS

OF THE

ASSOCIATION OF AVERAGE ADJUSTERS

OF CANADA

(Founded 1967)

2008-2009

___________

Chairman:

Ron Eldridge

____________

Executive Committee:

Ian Fraser, Chairman

Maurice Gesner Tony Brain

____________

Rules of Practice Committee:

Tony Brain, Chairman

Ian Fraser Gordon Gibbons

___________

Membership Committee:

Greg O’Brien, Chairman

Bill Kyle Maurice Gesner

____________

Advisory Committee:

David Holden, Chairman

Tony Brain Maurice Gesner

____________

Secretary

R. Fernandes

Claudio Verconich (Chairman): Good afternoon distinguished guests, ladies and gentlemen. Welcome to the 42nd Annual Meeting of the Association of Average Adjusters of Canada. I would like to extend a very warm welcome to our distinguished guests:

· Warren J. Marwedal President of the United States Maritime Law Association

It is also again my sad duty to pass on to you that one of our members, Mr. Chris Brotherton passed away in this past year.

Claudio Verconich: Before continuing with our meeting there is one formal matter which requires to be taken care of and that is the adoption of the Minutes of the last Annual Meeting held in Toronto Ontario on June 18th, 2007. I would therefore make the following motion: “that in accordance with the Bylaws, the Minutes of the last Annual Meeting, having been examined and certified correct by the Executive Committee, now be confirmed.” May I have a seconder?

Ian Fraser: I second the motion

All in favour? [Motion Passed]

Claudio Verconich: It has been an eventful year of my term as Chairman of our Association. It has again been a privilege and an honour to represent our Association at the events in the past year.

As this is my second year as Chairman I will be presenting a formal address. I will do so. The subject of my talk today is the Inchmaree Clause and its variant the Liner Negligence Clause. The names of these clauses have changed over the years, but are still most commonly referred to in this manner. During my talk I will be examining the evolution of the list of perils that were added in the last 120 years following the well-known decision of the House of Lords in 1887 relating to the vessel “Inchmaree”[1]. I will add commentary as to how the wordings have been interpreted through jurisprudence, and finish by providing an underwriter’s view and concerns regarding the future of the wording, and suggesting some changes thereto.

A much more learned individual began a similar speech in 1956 with the words: “I have found in everyday practice that the best course to take in dealing with problems is to start off from fundamentals”. Thus, in the words of the then Chairman of the Average Adjusters Association, Mr. D.V. Moore, I will begin with the background to the introduction of the clause. It was found in the 1887 case of Thames and Mersey Marine Insurance Co. v. Hamilton[2] that a donkey pump had been damaged due to a valve being closed, either from being silted up or through negligence. The Lords decided that such a loss was not due to a “peril of the seas”, or other like peril embraced by the ejusdem generis feature of the Perils Clause as it is contained in the S.G. policy form. Thus in 1889, the Negligence Clause was incorporated in the first edition of the Institute Time Clauses. It specifically provided coverage for loss or damage to hull or machinery through the negligence of the Master, Mariners, Engineers or Pilots, or through explosions, bursting of boilers, breakage of shafts or through any latent defect in the hull or machinery provided such loss or damage has not resulted from want of due diligence by the owners of the ship or by the Managers.

The clause has considerably evolved since 1889 with at least 11 versions thereof.

I will review that evolution from 1889 to the latest version in 2003, although with apologies, will concentrate on the ITC 1983 and AIHC 1977 wordings as they are the ones that are most in common use in the Canadian market. Versions of the American form, although in substance virtually identical, are used in both the CBMU Great Lakes Hull Clauses and the Canadian Hull (Pacific) Clauses. I will disregard the changes instituted with the 1995 and the 2002 wordings as they have largely not found favour with the market, either in Canada or elsewhere. I will include commentary on the London 2003 wording, although these also have not found much favour as yet. Nevertheless, they include the latest reworking of the clause in light of the most recent jurisprudence, in particular the Nukila case, which I will discuss more fully later in my address.[3]

Let me begin by stating that the Inchmaree clause has been updated whenever there was common agreement in London to add additional perils to it. This usually resulted from developing jurisprudence. Thus starting in 1916 and progressing through the 1930’s, various new perils were added. The opening words were also updated so as to be clear that the clause was only meant to cover loss of or damage to the subject matter insured directly caused by the perils mentioned, and in relation to several perils this meant that only the consequences thereof would be recoverable.

With the London departure from the use of the S.G. form in 1982, subsequent versions of the London wording included the perils as part of an expanded Perils clause. In North America, the original S.G. Perils clause, or a variant thereof, continues to be in common use. As a matter of construction the new London wording does allow for greater clarity, and the appropriate use of the due diligence proviso, and as such should probably be incorporated in future North American versions. The unwillingness of the American market to substantially change the Perils and Inchmaree clauses to date can only be attributed to a concern over the potential for increased litigation, and inability to rely on previous judicial decisions.

As the 1977 American wording was patterned on the latest then version of the ITC clauses of 1970, the last ones based on the SG policy form, I will begin there with my analysis of these additional perils: I will enumerate them now and discuss them in detail thereafter: They are:

1. Accidents in loading, discharging or shifting cargo or fuel;

2. Explosions on Shipboard or elsewhere;

3. Breakdown of or accident to nuclear installations or reactors on shipboard or elsewhere;

4. Bursting of boilers breakage of shafts or any latent defect in the machinery or hull;

5. Negligence of Master Officers Crew or Pilots;

6. Negligence of repairers provided such repairers are not Assureds hereunder;

7. Contact with aircraft

8. Contact with land conveyance, dock or harbour equipment or installation;

9. Earthquake, volcanic eruption or lightning

All these events were subject to the proviso that the loss was not the result of the want of due diligence by the Assured, Owners or Managers. Master, officers, crew or pilots are not to be considered owners even if they own shares in the vessel.

Accidents in loading, discharging or shifting cargo or fuel was first added as a peril in 1914, as a result of a case decided in 1916 where a vessel was damaged by a boiler which fell from a floating crane while being hoisted[4]. The phraseology is slightly different in the 1977 American clauses as well as the Canadian clauses, owing in part to the Americanized nature of the English tongue which I would presume is the reason that the word “handling” is preferred to the word “shifting”, and the preference for the phrase “in bunkering” rather than “shifting fuel”. In substance, the operative word is “accident” and there is considerable latitude given to the construction of the rest of the phraseology so that there is, in practice, little substantial difference between the two wordings. After 1982, English wording removed this peril from the list of perils subject to the due diligence proviso, as it was felt that an owner has no control over these types of accidents. I don’t believe there have been any cases where there was a defense alleging that there was lack of due diligence on the part of the Insured, so doubt whether this change to the positioning of the peril within the new Perils Clause is of much effect in North America. The last change was effected in 2002 by the addition of the words, “stores or parts” to the end of the English wording, likely not much of a substantive difference.

The peril of Explosion was included in the original version of the Inchmaree clause, as at the time, it was not settled by judicial review whether it was in fact ejusdem generis to the peril of fire. Certainly, you can have an explosion without resulting fire, so in order to avoid the question as to whether same was covered, it was added to the Inchmaree clause. In 1931, the wording was qualified by the addition of the words “on shipboard or elsewhere” in response to concern that if the accident occurred other than on the ship, the policy would not respond. This was tested in 1944 when a ship blew up in Bombay Harbour damaging nearby ships with the result that the new wording provided coverage to adjacent ships for damages they sustained. The current London wording has removed this peril from those subject to the proviso of due diligence, although it is noted by Buglass[5] that it is established law in the U.S. that the ship-owner must still prove that the explosion was a fortuitous event rather than the result of willful misconduct or design[6]. The latest versions of the peril also remove the distinction regarding “on board or elsewhere” as it is now deemed superfluous.

In examining the next peril regarding the effects of nuclear accidents, it is important to note that the London practice was to include such accidents if they happened either on board the ship, or elsewhere. The U.S. practice is only to cover such accident if they occur elsewhere than on board the ship. The current London thinking on the matter is that since explosion is already covered, there is no need to specify a special consideration for nuclear explosions. In any event, the most likely effect of a nuclear accident is the cost of decontamination and as this is generally excluded by the “Radioactive Contamination Exclusion Clause,” the peril can now be removed. The same is true with the generally used North American wording so that in effect, this peril has now probably become redundant.

I will pass on the next 3 named perils, so as to discuss them in greater detail later. Thus the next peril for consideration is that of contact with aircraft. This peril was added as a result of a 1943 case, which decided that an aircraft, even if a seaplane, is not a ship, and thus contact with same is not a “peril of the seas”[7]. The wording of the clause in the U.K. has seen some changes and the North American versions also vary to some extent. The current North American version includes contact with rockets or similar missiles. The 1983 version was also extended in a similar way to include contact with objects similar to aircraft, or objects falling there-from. This presumably brought the wording more in line with the American wording. The 2003 version of the English wording now also includes satellites and helicopters. Furthermore, in 1983 the London market decided to move the peril to the list which was not subject to the proviso of due diligence, although the 1995 wording is not consistent with this approach. In my opinion, regardless of the wording, the intention is clear and can’t see that any variant would fail to return the same coverage result. Furthermore, there has been no case to my knowledge where a suggestion of lack of due diligence was put forward.

The wording of the peril regarding Contact with land conveyance and harbour installations, etc. has seen little change in the London market since 1970. It was originally added so as to dispel any doubt as to whether this was a “peril of the seas”. The U.S. version uses different terminology but both wordings are generally in accord as to substance, and to my knowledge there have been no cases where issues have turned on the nature of either wording. Again, London has determined that such losses should not be subject to the due diligence proviso, and have further tightened the wording by amending the “Perils of the Seas” coverage provision to also include perils of rivers, lakes or other navigable waters. This should extend to also cover contact with dock and canal walls.

The final named peril is Earthquake, volcanic eruption and lightning. As seismic activity causing damage to a vessel at sea would likely be considered a peril of the seas, it can be presumed that the earthquake and volcanic eruption coverage that is envisioned here is that which might occur when the vessel is on land or in a repair facility. Lightning, when not deemed a peril of the sea, can cause damage to a vessel, primarily its electronic equipment so it is understandable that such coverage is desirable. It is interesting to note that the American Institute Hull Clauses do not cover volcanic eruption, and have included earthquake and lightning in the standard perils clause rather than the Inchmaree. This would imply that same is not subject to the due diligence proviso, as is the case in London. While the CBMU Great Lakes wording mirrors that of the U.S., it is interesting to note that the Canadian Hulls (Pacific) clauses follow the London 1970 standard.

We can now move on to a better discussion with regard to latent defect, breakage of shafts, negligence and the due diligence proviso. Not surprisingly, the authorities devote most of their prose to these subjects, bolstered by a rather impressive number of judicial cases relating thereto.

Starting with bursting of boilers, breakage of shafts and latent defect, issues arose very shortly after the introduction of the original Inchmaree Clause. The first important case was in 1902 with Jackson v. Mumford, but I will defer discussing that case until later, to start by at least establishing some common understandings:

1. It must first be remembered that the Marine Insurance Act as a blueprint for similar acts enacted in various common law jurisdictions stipulates that unless the policy otherwise provides, an insurer is not liable for ordinary wear and tear, inherent vice, or injury to machinery not proximately caused by maritime perils. In this context, it can be seen that absent the Inchmaree clause, loss due to latent defects would not be recoverable as properly being considered an inherent vice.

2. Ordinary wear and tear is not covered under the Inchmaree Clause, although if the wear and tear is deemed premature due to the action of a latent defect, then in most cases coverage is afforded. This may not always be the case and in the state of Florida, two cases decided under Florida law were distinct in finding for underwriters where vessel sinking due to corrosion arising from the use of dissimilar metals, unknown to the Insured, led to premature failure of underwater parts[8].

3. A triumvirate of cases decided from 1906 to 1911 which I will not identify here as they are as famous as the Inchmaree case and can easily be reviewed in any number of authoritative texts[9], established that:

Firstly, where a crack was discovered in the tail shaft due to an imperfect weld and the shaft was condemned, the judge remarked (and here I paraphrase freely) that: “The effect and sense of this clause is not that the underwriters guarantee that the machinery of the vessel is free from latent defects, or undertake…to make such defects good….the crack… is really nothing but the development of the…latent defect….a latent defect becoming patent is all that has happened, and…the latent defect becoming patent is not within the words of this clause.”

Then, with respect to a vessel built in 1906 discovered 2 or 3 years later to contain a crack in the stern frame which had been hidden by the shipyard, the judge stated that “The only damage is the latent defect itself, which by wear and tear has become patent”.

The final case established an example of the kind of loss that was meant to be recoverable. This was a case where a bucket ladder gave way due to a welding defect in a link of the hoisting chain. The consequent damage was recoverable although we can presume that underwriters did not pay for the replacement of the link.

4. As regards the definition of what constitutes a latent defect, Arnould describes a latent defect as a “condition causing premature failure which is present in the relevant part of the hull or machinery when it is constructed or installed in the vessel, or which comes into existence as a result of the way in which the relevant part was designed, constructed or installed.”[10]

In order for defect to be considered latent, it must not be discoverable by the Insured using ordinary care and competent skill. Latency is not just to the eye, but to the senses, using those tools and methods that one would expect should be used in the ordinary sense. It follows that if the defect could have been discovered by the Master or crew using reasonable care, their failure could be considered to be negligence.

From these rather simple beginnings have come a plethora of cases which time does not permit to exhaustively discuss, but which have in common been determined by the learned judges either to be in conformance with these principles, or not, depending on the facts and the degree by which the principles were applicable.

This now allows me therefore to concentrate on the evolution of the wording in light of two of the most recent cases:

In Prudent Tankers Ltd. S.A. v. Dominion Ass. Co. Ltd. (also known as The Caribbean Sea) (1980), a 19 year old vessel sank due to entry of seawater in her engine room during calm seas. Water entered through a fracture in a pipe with the owner’s contention that it was a latent defect and the underwriters contending that it was either a defect in design or the result of wear and tear.

Before continuing to discuss this case, it is time to bring back the deferred case mentioned earlier of Jackson v. Mumford.[11] In that case, a prototype vessel was constructed for the navy which due to high expectations required it to be built to exceptional standards, with little known as to how the design and material would stand up to the strains involved. The vessel subsequently broke down and in making his decision that the failure was not due to a defect in machinery as was alleged, the judge stated that the wording “does not in my view cover the erroneous judgment of the designer as to the effect of the strain which his machinery would have to resist, the machinery itself being faultless, the workmanship faultless, and the construction precisely that which the designer intended it to be.” In consequence of this decision, it was the generally accepted view until the Caribbean Sea that latent defect did not cover a weakness or defect in design.

Coming back to the Caribbean Sea then, the judge determined that contrary to the previously held view, an error in design could still be considered a latent defect in machinery. In his reasoning, he went on to say that it would “seem to matter not that it had come into existence by virtue of poor design, or poor construction, or poor repair” as long as the design was adequate for the ordinary tasks for which the ship was designed.

This is distinguishable from the Jackson v. Mumford case, as in that situation, the vessel was being forced beyond reasonable design parameters and thus the damage was due to a shortcoming of the design, not a defect. With the Caribbean Sea, the parts involved were working within their expected design parameters and since they failed, the cause was still deemed to be a latent defect. Regarding the argument that the loss was due to wear and tear, the judge also found that where a part failed prematurely, significantly before the end of the life of the vessel, it can not be wear and tear. As an aside, that last argument seems to me to be less likely to be accepted in the U.S. from the number of cases I reviewed. However, the former argument regarding a latent defect encompassing an error in design has already been substantially accepted in the U.S.

We now move on to the Nukila case mentioned earlier. That case was decided in 1997, and at first blush seems to be well in contrast with those decisions cited earlier having occurred at the beginning of the century. The facts were these: a jack-up platform was constructed with 3 legs connected underwater to spud cans, in order to maintain a bigger footprint and contact with the sea floor and provide increased stability. The legs were connected by circumferential welds at the top and bottom of the spud cans and these cans were watertight. Four years after installation, doing a routine inspection, it was found that serious cracks had developed in the top plates of all three of the spud cans. Damage was so severe that the platform was in danger of collapsing. Cracks had developed throughout most of the spud cans and were also extensive on the legs themselves. A claim was made for the extensive repairs required contended to be a result of latent defect. Underwriters resisted the claim based on previous authority that the entire leg structure was in fact one part as it performed only one function and was thus distinguishable from any other part. As such all the damage was merely the latent defect becoming patent, the inference being that the hull had not sustained any damage as a result. The court of first instance agreed with the underwriters’ contention, but this was reversed on appeal, by unanimous decision. It was found that the failure was due to incorrectly profiled welds. The welds were in a location where there was already a high stress concentration and an inadequately profiled weld would shorten the fatigue life of the structure and lead to fatigue cracking. The court found that the welds in and of themselves were the latent defect while the fractured metal was the damage that the hull sustained. The judges felt that there was nothing in the Inchmaree Clause that limited a latent defect to a “part” as the clause does not use the word. They also held that the premature failure removed any contention that the loss was due to wear and tear.

In the final analysis, the judges felt that this loss was distinguishable from previous cases due to a substantial difference in degree between the defect and the damage that resulted. Frankly, despite current thought to the contrary in London, I would have to agree. Nevertheless, the latest version of the Perils Clause as noted in the International Hull Clauses 2003 seeks to redress this perceived wrong, by stating that loss or damage caused by latent defect excludes any of the costs of correcting the latent defect.

To finish this discussion on latent defect, it must be noted that the American Institute and the CBMU use a different wording, still based on the Perils Clause, which also includes breakdown of motor generators or other electrical machinery and electrical connections thereto. Furthermore, the wording includes a statement to the effect that coverage excludes the cost and expense of replacing or repairing the defective part. This seems to resolve a lot of problems in practice, and has been identified by Buglass as being an important distinction in the American wording.

We move on to the coverage for negligence which is confined to the negligence of master, officers, crew, pilots, repairers, provided repairers are not an Insured. The American wording as well as the recent London wording now also includes the negligence of charterers provided they are not an Insured. In all cases, the proviso of due diligence is required of the Insured. As regards repairers, the concept would imply that a subrogated action can be commenced against them which leads to the reason why there is no coverage if the repair is effected at the Insured’s own yard. It is interesting to note, however, that the Canadian Hull (Pacific) Clauses seem to be unique in that they include the words: “but this exclusion shall not apply to loss or damage resulting from the operation by the Assured of a commercial repair division or facility”. Presumably, the expectation would be that the Ship Repairer’s Liability Policy would allow for claims from the ship-owning division of the Insured. As regards the Negligence of the master, officers and crew, these often lead to loss which can be attributed to a peril of the seas, but as can be seen by the Inchmaree case, there was a need for it to be covered on its own merits. The most important matter for dispute with respect to this coverage is determining if the negligence is due to the act of the master, or the failure of the owner to exercise due diligence. It has been established that there is a separation of duties relating thereto with the owner being responsible for ensuring the vessel is ready to go to sea while the master and crew taking charge once it does. Where the owner is also the master, the courts have had to separate his responsibilities between those of a master and those of an owner before being able to determine whether there is coverage under the Inchmaree Clause.

An important case distinguishing between these two duties was decided in 1975 in Coast Ferries Limited v. Century Insurance Co. of Canada[12]. A converted automobile ferry loaded with cargo went to sea with insufficient freeboard which resulted in entry of water and consequent rolling over of the vessel. It was alleged that the loss was due to the master’s negligence in loading the cargo, but the court of appeal found that the owner had conducted stability tests and in fact had prepared a manual which outlined the safe loading characteristics of the vessel. The fact that he had not brought this information to the attention of the master established that he had failed in his duty to exercise due diligence.

A final point to make here is that it is important to distinguish between negligence as understood in this context, against negligence as understood in a 3^rd party liability environment which is more onerous. Furthermore it has also been shown to be distinguishable from simple error in judgment or incompetence.

As regards the matter of due diligence, it needs to be noted that the standard expected is often fluid and has been applied in a discretionary manner in many court cases. It would seem that an example of lack of due diligence would be when a vessel is sent to sea in an un-seaworthy state with the privity of the Insured. This could include improper loading as was found to be the case in Coast Ferries Ltd. v. Century Insurance Company of Canada noted above. Strathy and Moore contend that it is expected of the owner to act responsibly in the upkeep of the ships and the training of the crew[13]. This should include reasonable steps in the hiring of a competent crew as well as providing the necessary training, instruction and supervision to ensure that the crew members are capable of carrying out their duties in a responsible manner. It seems to me that the expectation that the courts have put on this subject seems to often fall well below such a standard. A number of other Canadian cases seem to imply that at least in Canada, the owner is held to a higher standard than appears to be the case in the U.S. However, there have a number of notable exceptions in that regard. As an example, a recent case in the Nova Scotia courts, upheld on appeal, found that even where the client had lost all their records relating to the maintenance of a vessel, and relying mainly on the memory of a chief engineer, it was determined that the requirement of due diligence had still been discharged. This was despite the fact that the standard of care exercised in the maintenance of the vessel was well below the international standard[14].

The question as to who bears the burden of proof in establishing lack of due diligence is one that is particularly vexing. It is now well established that it is the responsibility of the Insurer to do so. However, in the Coast Ferries Ltd. vs. Century Ins. Co. of Canada decision, the judge held that in order to recover under the clause, the Insured had to prove due diligence. In the same case, the Supreme Court of Canada stated that “the duty of due diligence imposed upon the owner is not satisfied if for years he closes his eyes and does nothing.” The court also established that in determining due diligence, all the surrounding circumstances should be considered including those known or reasonably to be expected. This would include reviewing the practice of others involved in the same industry. It must also be remembered that in cargo cases, the onus of establishing that due diligence was exercised lies with the ship-owner.

It has been suggested that marine policies should be written on an all risks basis but according to Goodacre, underwriters are reluctant to do so as it is preferable for the Insured to bring himself within the named perils on the basis that he is in a better position of being able to furnish all the necessary proof in support of his contentions. This then leads one to question the principle that the burden of showing lack of due diligence rests with the underwriters. It is my contention that the intention of the clause does not lend itself to such interpretation due to the fact that the proviso is not an exclusion as we commonly understand it to operate on an all risks policy. It is in fact a condition precedent. In the former case, the underwriters have the ability through the investigation of the claim to discover the actual cause of loss and if it is deemed to be due to excluded circumstances, can adequately argue to that effect. However, when it comes to due diligence, the bulk of the information leading to the determination of whether or not due diligence has been exercised, lies with the Insured. It then becomes a commercial nightmare for underwriters to obtain the appropriate information to prove that their client has been less than diligent. The opportunity for the client to hide the extent of his malfeasance is quite significant, and it may only be through the discovery process in a court case that the true facts may be made known. This is nonsensical, as one can not expect both from a practical or a commercial sense, that each case should be litigated. In any event, it is my contention that the courts have often shown a cavalier attitude towards what they would expect an owner to show in establishing a case of complying with the proviso.

It has been noted that the hiring practices of an owner are rather important in determining whether or not due diligence has been exercised. I cite the case of Piermay Shipping C. v. Chester[15], which involved barratry and was the cause of the transfer of this old S.G. peril to the list of perils requiring due diligence in the current London wording. In that case, the vessel was scuttled by one of her engineers who had been accused of doing the same to another vessel years before in a well-publicized case. The question was whether the Insured showed lack of due diligence in the hiring of the engineer, the presumption being that hiring incompetent or negligent staff would be a lack of due diligence. Yet, and here I stand to be corrected, I have seen little examination on the part of an average adjuster in determining whether a crew member alleged to have caused damage due to negligence was competent to do the job and whether the owner exercised due diligence in the hiring of same.

It is not my contention that matters can be reversed now that the principles have been well established. What needs to change is the wording of the clause so as to ensure that the burden of proving the discharge of the due diligence requirement should lie squarely with the Insured. Furthermore, the wording should require a stipulation that unless the client provides all pertinent information as underwriters may require in order to determine whether or not due diligence has been exercised, the claim must fail. The AIMU is currently undertaking a review of the 1977 clauses and have identified concerns over the way negligence and due diligence are currently treated. They propose a definition of what constitutes negligence, and deem that repeated acts of negligence by the same Insured should be regarded as sufficient proof of lack of due diligence. I’m not sure if that is workable in practice, but it is refreshing to see that I am not the only one who sees a need for tightening the due diligence proviso.

I now would like to add a quick word about the variant to the Inchmaree Clause, the Liner Negligence Clause otherwise referred to as the Additional Perils Clause. This clause came into use in England in 1932 and remained substantially unchanged until it was redrafted in 1983. The U.S wording maintains the pre-1983 verbage. Time does not permit me to do full justice to the implications of the wording, but wish to at least point out the differences as they relate to the American wording and forms most commonly used in Canada. These are:

1. Clause will pay for the breakage of shafts or bursting of boilers simpliciter. It must be noted that breakage does not necessarily mean a severance into two parts. A sufficiently large crack that can not be ground out and leads the shaft being condemned is sufficient. There would also be coverage if the loss is due to wear and tear.

2. It covers “all accidents”, making it in effect an all risks clause.

3. It will pay for the making good of the latent defect although still requires the need for resulting damage to have occurred.

4. It will not pay for condemnation if sole reason is latent defect, error in design or construction

5. Includes “error of judgment” and “incompetence” of any person, which according to Goodacre, is sufficiently wide to include loss or damage caused by error in design or construction.

What is probably not realized is that this wording is a considerable extension to the Inchmaree Clause and I know the differences are often not fully appreciated by the underwriting community. My earlier comments regarding lack of due diligence need to be qualified, as unlike the Inchmaree Clause, the all risks nature of the wording would turn the proviso more into the nature of an exclusion.

Another point I wish to make relates to the distribution of common expenses when a claim occurs as a result of a latent defect. The 2003 IHC clauses specifically state that underwriters will respond to 50% of the common expenses relating to the repair of a burst boiler or broken shaft and 50% of the common expenses relating to a correction of a latent defect. If coverage is extended to include the optional additional perils clause, then underwriters will pay 100% of all common expenses. I have on occasion seen claims where the only amount that was removed from the costs relating to the consequences of a latent defect within an engine was the actual cost of the broken bolt, or similar low valued part. Although I am sure that this should not have been the case, it is of value to consider amending the North American variations of the clauses to also specifically allow for a recognized distribution of common costs.

I am sure that everyone has now had just about enough of this discussion and would like to move on to more relaxing endeavours. However, I would be remiss if I ended this talk without some reference to the future of the clause and commercial realities relating thereto. There is ample evidence that the world is experiencing a severe shortage of skilled seafarers. The reasons for this are numerous, not the least of which is the great increase in the number of vessels plying the seas, likely to continue into the foreseeable future. In 2005, the IMO estimated that the global shortfall of officers was about 10,000. It expected to shortfall to be 27,000 by 2015. This combined with the increasingly unpleasant environment that seafarers have to cope with, either through heavy work schedules, fear of jail sentences for simple acts of negligence, and even the risk of piracy, leads one to conclude that ship-owners will be increasingly challenged in finding competent crews to man their vessels. This is likely to lead to substantial increase in losses due to negligence.

It also must be noted that claim amounts are not reducing, especially as they relate to engine damages. John Lillie, the president of the Society of Consulting Marine Engineers and Ship Surveyors, recently highlighted the shocking number of damages to engines, with 10% of main engine damages happening on new ships. Average cost of main engine repairs was $500,000, that for auxiliaries was $300,000. Turbochargers and crankshafts are items causing concern and high claims. He particularly noted the problems that could occur when ships changed hands. This opinion was reinforced by the Swedish Club which noted that medium speed engines as being particularly problematic with crankshafts, while low speed engines have turbo charger problems. The average claims cost for these types of losses rose 26% in 2005/2006 compared to the previous 8 year average.

The club further stated: “It is not uncommon that chief engineers and/or first engineers fail to understand the relevance of alarms going off in the engine room. Equally common is that the engine personnel do not know how to properly operate some of the equipment on board.” Machinery damage already tops the claims list for the Swedish Club and is expected to become even more expensive. Many incidents of grounding, collisions and contacts are in fact caused by machinery breakdowns.

Helle Hammer of CEFOR noted that “with the cost of accidents due to human error on the rise, the scarcity of skilled seafarers to operate increasingly sophisticated vessels remains one of our main concerns.” The average hull claim has increased by 86% over the last five years, driven to a large extent by market factors such as repair and the cost of spare parts. IUMI in their 2008 meeting highlighted that there is a “clear trend toward higher attritional claims cost” (Astrid Seltman – Facts and Figures Vice Chairman).

We have had our own horror stories in Canada and it is not unusual to see machinery damage claims increasing by as much as 300% over the initial estimate of damages. This is particularly the case where machinery is found to be obsolete with the only solution being the installation, at a high cost, of new equipment.

This leads me to question the practical and commercial viability of maintaining the Inchmaree cover in its present form. This is even truer with regard to the Liner Negligence Clause which is often treated as a “throw in” cover when the jurisprudence clearly indicates that it provides substantial additional coverage. For the time being, these risks are still being underwritten, but I wonder whether the right price is being charged. It is a basic underwriting principle that you collect premium today to pay for tomorrow’s losses, in addition to covering your current expenses. If the loss development continues to deteriorate at the present pace, the premium that would need to be charged may be more than ship-owners are willing to pay. It may then be necessary to consider a revamping of the clause in order to reduce exposure and keep hull insurance affordable.

Thank you. Are there any comments from the floor?

Ian Fraser: Claudio, I thank you for your comments and an enlightening speech.

Reports

Report of the Nominating Committee: Ian Fraser

Greg O’Brien: Good evening ladies and gentlemen. In the coming year Ron Eldridge from Toronto will serve as Chairman. The Executive Committee will be headed by Ian Fraser, Chairman, Maurice Gesner and Tony Brain. The Rules of Practice Committee Chairman will be Tony Brain, with members Ian Fraser and Gordon Gibbons from the underwriters side. Membership Committee – Chairman will be headed by myself, with members Bill Kyle and Maurice Gesner. The Advisory Committee –will be headed by David Holden and he will be assisted by Tony Brain and Maurice Gesner. Rui Fernandes will continue as Secretary - Treasurer. Thank you

Report of the Membership Committee: Bill Kyle

Ron Eldrige: I will be presenting this report on behalf of the Membership Committee.
There have been two new Resident Associates approved at our business meeting yesterday:
Mr. Errol Pinto and Mr. Rene Montpetit.

Claudio Verconich: Well, thank you all for attending today. I would like to thank Executive and all the committees for the great work done this year. I would also like to thank the Secretary of the Association Rui Fernandes.

Is there any other business today? If there isn’t, I will therefore declare the meeting adjourned.

[Meeting Adjourned]